The world seems to have a bit of a problem with impulse control these days whether it be with Tiger Woods, Bernie Madoff, or philandering politicians. Certainly none of us have total control of the things that we do, that we know are bad for us, but we do them anyway. When it comes to your personal finances there are two things that are critical; how much money you make and how much money you spend. It’s hard to control the income we earn especially when we have a world with 10 percent unemployment. Yet we can have a lot of control in terms of what we spend. In fact I’m convinced everyone could live within their means except for the fact that they don’t want to adjust their lifestyle. What I find particularly interesting is that in fact we are actually increasing our savings dramatically since the recession hit. Also our spending is being curtailed at a time when we’re a little bit fearful, so maybe being scared is a good thing!
What if I told you that how we handle our impulse control and how we delay gratification could already be in our makeup before the time you were five years old? A recent article in the New Yorker rekindled this study. The marshmallow experiment was done in the 1960s by Stanford professor and researcher Walter Mischel. He did it with a group of children, including his daughter, at a nursery school where he gave the children a choice of a treats like marshmallows, cookies and pretzel sticks. He told the children that they could eat one marshmallow right away or if they were willing to wait a few minutes they could have two marshmallows when he returned. He said that if they rang the bell on the desk he would come running back and they could eat the one marshmallow but that have to forfeit the second. Then he left the room. What they found was that most of the kids didn’t wait for the bell they just ate it. Only 30 percent of the children actually were able to wait for 15 minutes to double their treat.
Prof. Mischel informally began to ask his children about how their friends from the nursery school were doing at normal dinner conversations. Although he kept the children’s identity a secret, he realized there was a correlation between those that had self-restraint and how they were doing in their personal lives and school. So starting in 1981 he sent out a questionnaire to all those 653 subjects who participated in the marshmallow task that were reachable and who were then in high school. He asked numerous questions on how they were doing and even got their SAT scores. What he found was that those who didn’t have the self-control were more likely to have behavioral problems and they got lower SAT scores. They also struggled in stressful situations and often were having trouble paying attention and maintaining friendships. The child who could wait 15 minutes for marshmallow had an SAT score that was on average 210 points higher than that of the kid who would wait only 30 seconds.
The parallel I use for our personal struggle with the battle of the budget is that we probably have a lot of our own marshmallows that we don’t need to eat right way and if we could just save some money over time we could probably double the positive effects of restraint. For a four-year-old child 15 minutes seems like infinity but if they could wait 15 minutes they would actually double their treat. On the other hand, we adults need to save money over a long period of time to reach our goals. If they could just delay that gratification and invest in something that earns a 7.2 percent rate of return, than we would double our money in 10 years. The rule of 72 is a mathematical concept and does not guarantee investment results or function as a predictor of how an investment will perform. It is simply an approximation of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value. (The rule of 72 shows that if you divide your rate of return into 72 it tells you how long it takes you double your money).
If you are finding yourself tightening your belt these days like I am, then take advantage of a difficult time to change those spending habits, even though 70 percent of the nursery school kids couldn’t. We are adults now and we are continually tempted by our peers, advertising and our children to spend money on things that we really don’t need. So just ratchet your spending down a little because a dollar saved now, could be two over the next decade. Just think how many marshmallows that could buy!
Watch a modern-day version of this marshmallow test to give you a sense of just how much these kids are struggling to not eat that little candied puffball.
Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA
